Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments

v2.4.0.6
Financial Instruments
 6 Months Ended
Jun. 30, 2012
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Financial Instruments
Note 3 – Financial Instruments

The Company operates globally, with manufacturing and sales facilities in various locations around the world.  Due to the Company’s global operations, the Company engages in activities involving both financial and market risks.  The Company utilizes normal operating and financing activities, along with derivative financial instruments, to minimize these risks.

Derivative Financial Instruments. The Company uses derivative financial instruments to manage its risks associated with movements in foreign currency exchange rates, interest rates and commodity prices.  Derivative instruments are not used for trading or speculative purposes.  For certain derivative contracts, on the date a derivative contract is entered into, the Company designates the derivative as a hedge of a forecasted transaction (cash flow hedge).  The Company formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction.  This process includes linking derivatives that are designated as hedges to specific forecasted transactions.  The Company also assesses, both at the hedge’s inception and monthly thereafter, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in the anticipated cash flows of the hedged item.  If the hedging relationship ceases to be highly effective, or it becomes probable that a forecasted transaction is no longer expected to occur, gains and losses on the derivative are recorded in Cost of sales or Interest expense as appropriate.  There were no material adjustments as a result of ineffectiveness to the results of operations for the three months and six months ended June 30, 2012 and July 2, 2011. The fair market value of derivative financial instruments is determined through market-based valuations and may not be representative of the actual gains or losses that will be recorded when these instruments mature due to future fluctuations in the markets in which they are traded.  The effects of derivative and financial instruments are not expected to be material to the Company’s financial position or results of operations when considered together with the underlying exposure being hedged.

Fair Value Hedges. During 2012 and 2011, the Company entered into foreign currency forward contracts to manage foreign currency exposure related to changes in the value of assets or liabilities caused by changes in foreign exchange rates.  The change in the fair value of the foreign currency derivative contract and the corresponding change in the fair value of the asset or liability of the Company are both recorded through earnings, each period as incurred.

Cash Flow Hedges. The Company enters into certain derivative instruments that qualify as cash flow hedges.  The Company executes both forward and option contracts, based on forecasted transactions, to manage foreign exchange exposure mainly related to inventory purchase and sales transactions.  The Company also enters into commodity swap agreements, based on anticipated purchases of aluminum, copper and natural gas, to manage risk related to price changes.  In addition, the Company enters into forward starting interest rate swaps to hedge the interest rate risk associated with the anticipated issuance of debt.

A cash flow hedge requires that as changes in the fair value of derivatives occur, the portion of the change deemed to be effective is recorded temporarily in Accumulated other comprehensive loss, an equity account, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  As of June 30, 2012, the term of derivative instruments hedging forecasted transactions ranged from one to 20 months. 
 
Foreign Currency. The Company enters into forward and option contracts to manage foreign exchange exposure related to forecasted transactions, and assets and liabilities that are subject to risk from foreign currency rate changes.  These include: product costs; revenues and expenses; associated receivables and payables; intercompany obligations and receivables; and other related cash flows.

Forward exchange contracts outstanding at June 30, 2012 and December 31, 2011 had notional contract values of $75.1 million and $112.1 million, respectively.  Option contracts outstanding at June 30, 2012 and December 31, 2011, had notional contract values of $135.6 million and $106.8 million, respectively.  The forward and options contracts outstanding at June 30, 2012 mature during 2012 and 2013 and mainly relate to the Euro, Japanese yen, Canadian dollar, Australian dollar, British pound, Mexican peso, Norwegian krone, Swedish krona, New Zealand dollar, and Hungarian forint. As of June 30, 2012, the Company estimates that during the next 12 months, it will reclassify approximately $1.5 million of net losses (based on current rates) from Accumulated other comprehensive loss to Cost of sales.

Interest Rate. The Company enters into forward starting interest rate swaps to hedge the interest rate risk associated with the anticipated debt refinancing in 2013 of the Company's senior notes due in 2016. Forward starting interest rate swaps outstanding at June 30, 2012 and December 31, 2011 had notional contract values of $100.0 million and $50.0 million, respectively.

As of June 30, 2012 and December 31, 2011, the Company had $2.9 million of net deferred losses and $0.5 million of net deferred gains, respectively, associated with all forward starting interest rate swaps, which were included in Accumulated other comprehensive loss.  These amounts include gains deferred on $250.0 million of notional value forward starting interest rate swaps terminated in July 2006, net of losses deferred on $150.0 million of forward starting swaps, which were terminated in August 2008, and losses deferred on $100.0 million of notional value forward starting swaps, which were outstanding at June 30, 2012.  As of June 30, 2012, the Company estimates that during the next 12 months, it will reclassify approximately $0.9 million of net gains resulting from settled forward starting interest rate swaps from Accumulated other comprehensive loss to Interest expense.

Commodity Price. The Company uses commodity swaps to hedge anticipated purchases of aluminum, copper and natural gas.  Commodity swap contracts outstanding at June 30, 2012 and December 31, 2011 had notional contract values of $31.3 million and $27.1 million, respectively.  The contracts outstanding mature through 2014.  The amount of gain or loss associated with these instruments are deferred in Accumulated other comprehensive loss and are recognized in Cost of sales in the same period or periods during which the hedged transaction affects earnings.  As of June 30, 2012, the Company estimates that during the next 12 months it will reclassify approximately $4.1 million in net losses (based on current prices) from Accumulated other comprehensive loss to Cost of sales.

As of June 30, 2012, the fair values of the Company’s derivative instruments were:
(in millions)
 
 
 
 
 
 
Derivative Assets
 
Derivative Liabilities
Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Foreign exchange contracts
 
Prepaid expenses and other
 
$
1.8

 
Accrued expenses
 
$
0.9

Commodity contracts
 
Prepaid expenses and other
 
—

 
Accrued expenses
 
5.0

Interest rate contracts
 
Prepaid expenses and other
 
0.2

 
Accrued expenses
 
5.4

Total
 
 
 
$
2.0

 
 
 
$
11.3


As of December 31, 2011, the fair values of the Company’s derivative instruments were:
(in millions)
 
 
 
 
 
 
Derivative Assets
 
Derivative Liabilities
Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Foreign exchange contracts
 
Prepaid expenses and other
 
$
3.9

 
Accrued expenses
 
$
1.5

Commodity contracts
 
Prepaid expenses and other
 
—

 
Accrued expenses
 
4.1

Interest rate contracts
 
 Prepaid expenses and other
 
—

 
Accrued expenses
 
2.4

Total
 
 
 
$
3.9

 
 
 
$
8.0



The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended June 30, 2012 was: 
(in millions)
 
 
 
 
Fair Value Hedging Instruments
 
Location of Gain on Derivatives
Recognized in Earnings
 
Amount of Gain on Derivatives Recognized in Earnings
Foreign exchange contracts
 
Cost of sales
 
$
1.9

Foreign exchange contracts
 
Other income, net
 
0.1

Total
 
 
 
$
2.0


Cash Flow Hedge Instruments
 
Amount of Gain (Loss) on Derivatives Recognized in Accumulated Other Comprehensive Loss (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
Interest rate contracts
 
$
(3.9
)
 
Interest expense
 
$
0.3

Foreign exchange contracts
 
3.1

 
Cost of sales
 
(0.4
)
Commodity contracts
 
(4.1
)
 
Cost of sales
 
(1.3
)
Total
 
$
(4.9
)
 
 
 
$
(1.4
)

The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the six months ended June 30, 2012 was: 
(in millions)
 
 
 
 
Fair Value Hedging Instruments
 
Location of Gain on Derivatives
Recognized in Earnings
 
Amount of Gain on Derivatives Recognized in Earnings
Foreign exchange contracts
 
Cost of sales
 
$
1.3

Total
 
 
 
$
1.3


Cash Flow Hedge Instruments
 
Amount of Gain (Loss) on Derivatives Recognized in Accumulated Other Comprehensive Loss (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
Interest rate contracts
 
$
(2.9
)
 
Interest expense
 
$
0.5

Foreign exchange contracts
 
(1.5
)
 
Cost of sales
 
(0.2
)
Commodity contracts
 
(2.9
)
 
Cost of sales
 
(2.1
)
Total
 
$
(7.3
)
 
 
 
$
(1.8
)

The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended July 2, 2011 was:
(in millions)
 
 
 
 
Fair Value Hedging Instruments
 
Location of (Loss) on Derivatives
Recognized in Earnings
 
Amount of (Loss) on Derivatives Recognized in Earnings
Foreign exchange contracts
 
Cost of sales
 
$
(1.0
)
Total
 
 
 
$
(1.0
)

Cash Flow Hedge Instruments
 
Amount of Gain (Loss) on Derivatives Recognized in Accumulated Other Comprehensive Loss (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
Interest rate contracts
 
$
—

 
Interest expense
 
$
0.2

Foreign exchange contracts
 
(1.8
)
 
Cost of sales
 
(4.4
)
Commodity contracts
 
(0.4
)
 
Cost of sales
 
1.2

Total
 
$
(2.2
)
 
 
 
$
(3.0
)

The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the six months ended July 2, 2011 was:
(in millions)
 
 
 
 
Fair Value Hedging Instruments
 
Location of (Loss) on Derivatives
Recognized in Earnings
 
Amount of (Loss) on Derivatives Recognized in Earnings
Foreign exchange contracts
 
Cost of sales
 
$
(2.3
)
Foreign exchange contracts
 
Other income, net
 
(0.1
)
Total
 
 
 
$
(2.4
)

Cash Flow Hedge Instruments
 
Amount of Gain (Loss) on Derivatives Recognized in Accumulated Other Comprehensive Loss (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
Interest rate contracts
 
$
—

 
Interest expense
 
$
0.5

Foreign exchange contracts
 
(6.7
)
 
Cost of sales
 
(6.1
)
Commodity contracts
 
1.2

 
Cost of sales
 
2.0

Total
 
$
(5.5
)
 
 
 
$
(3.6
)

Concentration of Credit Risk. The Company enters into financial instruments and invests a portion of its cash reserves in marketable debt securities with banks and investment firms with which the Company has business relationships, and regularly monitors the credit ratings of its counterparties.  The Company sells a broad range of recreational products to a worldwide customer base and extends credit to its customers based upon an ongoing credit evaluation program.  The Company’s business units maintain credit organizations to manage financial exposure and perform credit risk assessments on an individual account basis.  Accounts are not aggregated into categories for credit risk determinations.  There are no concentrations of credit risk resulting from accounts receivable that are considered material to the Company’s financial position.  Refer to Note 8 – Financing Receivables for more information.

Fair Value of Other Financial Instruments. The carrying values of the Company’s short-term financial instruments, including cash and cash equivalents, accounts and notes receivable and short-term debt, including current maturities of long-term debt, approximate their fair values because of the short maturity of these instruments.  At June 30, 2012, the fair value of the Company’s long-term debt was approximately $718.5 million and was determined using Level 1 inputs described in Note 4 – Fair Value Measurements, including quoted market prices or discounted cash flows based on quoted market rates for similar types of debt.  The carrying value of long-term debt, including current maturities, was $673.7 million as of June 30, 2012.